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Optimism is a fragile thing but it’s growing in the retail banking industry, as reflected in the interviews we conducted for this BAI Banking Strategies Executive Report entitled “A Look Ahead to U.S. Retail Banking in 2015.”

The Questionable Effects of Promotional Deposit RatesPromotional rates on deposits, or ‘specials,’ usually fail to attract new balances or shift money to longer-term accounts in the current rate environment. by DAN GELLERJul 1, 2014 |
5 Comments

Specials on deposit accounts are promotional rates designed to attract new money or to shift balances to term accounts, which provide stable and projectable liquidity to the institution. In the 12-month period from June 2013 to May 2014, neither of these objectives has been reached overall by the use of promotional rates. Moreover, it is likely that institutions incurred higher interest expense with specials on balances they could have obtained for a much lower regular rate.

Analysis of the percentage change in regular annual percentage yield (APY), special APY and balances of deposit accounts shows that specials on long-term certificates of deposits (CDs) of over three years were the most ineffective in attracting new money. During the 12-month period, the average APY of specials on such CDs increased by 75.7%, yet balances fell by 5.9%. Similarly, the APY on promotional mid-term CDs (one to three years) increased by 15.7% while balances decreased by 3.5%. For short-term CDs (up to one year) the specials’ APY rose by 13.3% while balances dropped by 2.3%.

The picture is slightly different but not any better for checking and money market accounts. The APY on promotional checking and money markets was flat in the past 12 months, yet balances increased by 14.1% and 6.6% respectively. Moreover, the balance increase in these accounts occurred despite a decrease of 4.1% in the regular APY of checking and 6.5% for money market accounts.

Perhaps the most revealing finding of this analysis has to do with savings accounts, which experienced a 13.7% increase in specials’ APY during the period while balances increased by 9.1%. However, it is not very likely that these promotional rates contributed much to the increase in savings balances since balances of other liquid accounts increased as well even while the rate on their specials remained flat. Thus, it is plausible that savings account balances would have risen anyway without institutions having to pay a higher APY for specials.

The obvious conclusion, then, is that promotional rates are not very effective in attracting new money or in shifting balances to long-term accounts. It is possible that gains might be achieved for individual institutions and/or in specific markets, but overall, nationally, the specials aren’t working in the current rate environment.

I received numerous inquires regarding the findings of this analysis, so I would like to embellish the article with the following:
1. This is a macro analysis designed to observe national trends. As stated, the findings of the analysis may not match the experience of some individual institutions or regions.
2. The analysis does not distinguish between existing balances and acquisition balances. We use FDIC balance data which shows only total balances per product.
3. The research question at the heart of the analysis was: Do promotional rates, collectively, shift balances from liquid to term and from short term to long term products in the current rate environment? The findings show that this was not the case during the time period examined.
4. These findings do not necessarily suggest that in individual bank cases or selected markets the result may vary. However, as a national trend, promotional rates collectively were not very effective during the examined time period.

dan geller7/7/2014 1:04 PM

Thanks, Betty; I just sent you an email.

betty cowell7/7/2014 7:17 AM

I do hear your arguement...so would you say then that this is because of the low interest rate environment and there just isn't enough difference in rates across maturies to motivate consumers. I also enjoyed your last piece by the way. As another deposit guru of sorts, I am always interested in what folks are thinking about.
On that note - have you given much thought to what will happen to all the liquidity in commercial deposits in a rising rate environment given new liquidity rules? Answer me through email if you will.

dan geller7/2/2014 2:29 PM

Hi Betty, yes of course, which is why I noted that “gains might be achieved for individual institutions and/or in specific markets” and you are one of them. However, on the macro level, nationally, specials aren’t very effective in the current rate environment, but it does not mean that their impact will not improve in a rising rate environment.

betty cowell7/2/2014 10:24 AM

Dan,
I always enjoy reading your pieces but my experience with specials and promotions is very different than your findings - I couldn't have done my job without them.
Betty